Venezuela's regime: Putting the screws on the bankers

21.02.05 | From any rational viewpoint, the “indexed mortgages” issue is an economic and social problem, not a political one. But with its customary manipulative skill, the Chávez administration has turned it into a weapon with which to persecute and intimidate the bankers and is using it as an excuse to, once again, engage in cheap populism, this time with the money of the depositors.

The indexed loans came about as a way of facilitating people’s access to mortgages in times of inflation. When inflation increases, the possibility of long-term loans vanishes. The reason is that no one wants to lend because, when the capital is finally repaid, it is worth nothing.
One solution to this problem was to index the interest rates to enable the lender to preserve the value of his money and, so, maintain the flow of loans. In practice, things did not work out that way, because when the interest rates increased, the quotas became unpayable.

Then, someone had the idea of indexing the capital instead of the interest rates, and at the same time a ceiling was put on the quotas, which were calculated as a percentage of the mortgagor’s income. It was thought that the quotas would increase in line with salaries and would, therefore, remain within the means of the mortgagor. So, that was how that the “Mexican loan” or “indexed loan” came to Venezuela ten years ago.
At that time, it seemed that a sensible formula had been found to the problem, and it was even authorized by the Central Bank. Part of the formula was that, if the quota was insufficient to cover payment of the interest, the difference would be added to capital and the term of the loan would be extended. Unfortunately, however, the solution did not work in practice and the loans became unpayable.

Venezuela, unlike Mexico, is a country where inflation remains high in times of recession. Salaries did not go up in line with inflation and the quotas were not even sufficient to cover payment of the interest, with the result that the difference was added to capital.

Many banks and their mortgagors managed to get around the trap into which they had fallen by negotiating a rescheduling of the debts. The efforts of others fell short.

When the government got involved, it began to impose new conditions that favored mortgagors at the expense of lenders and, what is worse, in a move that is far from clear, it has politicized the problem and is using it to browbeat the bankers.

To justify this intimidation, it alleges that the business of “adding interest to capital” is the same as “charging interest on interest” and has determined that this classifies as a crime of usury, despite the fact that the practice had been specifically authorized by Sudeban and the Central Bank. To top it all, last week, the General Prosecutor’s Office brought charges against seven presidents of leading banks and issued an order forbidding them to leave the country. Even more serious, rumor has it that several hundred bank executives are apparently also going to be charged.
Once again, the government has turned a problem that is strictly socioeconomic and commercial into an instrument of persecution. This time it’s the turn of the bankers.